(Reuters) – Jamie McGeever
With the U.S. inflation report for August out, the previously unthinkable is now possible: Can the Fed raise rates next week 78 basis points?
This is what U.S. interest rate futures traders valued 30 % probability by Tuesday, which shook global markets. Economists at Nomura now use this as their base case forecast.
While U.S. inflation may have peaked, it’s more resilient than policymakers thought. The figures for August – monthly, annual, core and headline – were above expectations.
The market did what the market did: they overreacted. Wall Street tumbles – Nasdaq down 5% – Dollar surges, 2-year bond yields soar bps to 78 – 3.78% of the yearly high. That’s actually a quarter of the policy tightening in one day.
The interest rate market has said goodbye to the Fed raising interest rates by half a point next week. The debate now is whether the Fed will object to expectations for 100 basis point growth. Looking back on June, they’ve formed that.
Of course, the higher the rate expectations – the final rate is now around 4.30% – the greater the chance of a recession. About 50 basis points of rate cuts are now factored into the 2023 curve.
While the US recession will be policy-induced, the looming recession in Europe will be driven by energy prices squeezing consumers. HSBC estimates that Germany may have slipped into recession, according to the latest ZEW Business Sentiment Survey on Tuesday.
That’s the gloomy environment in which Asia woke up Wednesday. Japan’s Tankan survey and India’s current account and inflation data may distract from the US interest rate story, but it may be fleeting.
Major developments that should give the market more direction on Tuesday:
Tankan (September)
Japan Machinery Orders (July)
India Trade, Current Account (Q2)
